'All bets off' if Iraq war spreads, FSA warns

The financial markets could suffer a major slump if any war with Iraq spread into a wider regional conflict, the chief City regulator warned yesterday.

Sir Howard Davies, the chairman of the Financial Services Authority, said traders had already priced in a "shortish, sharpish" attack on Saddam Hussein

But if any US-led attack on Iraq became a protracted war or spread to neighbouring countries then "all bets are off", he said. "In a sense you've already got a war built into the markets," Sir Howard told BBC1's Breakfast with Frost.

"If you had a shortish sharpish war, with a short disruption in oil supplies clearly you've already had the effect of that on the markets. Clearly what you can't forecast is what would happen if it were a long, drawn out conflict which spread into Saudi Arabia. Then all bets are off, I'd say."

He said fears of potential disruption in oil supplies from the Gulf had already put a risk premium on oil prices of between $5 and $8 a barrel, which had in turn dashed hopes of a strong, early recovery. His comments came as hopes rose that Opec, the oil cartel that controls 40 per cent of supply, would increase output when it meets on Thursday to push prices down from a recent peak of $30 a barrel.

However, there are deep splits within Opec. Yesterday Chakib Khelil, Algeria's Energy Minister, said the organisation was "ready to satisfy any need on the market and deal with any repercussion on the market".

But Qatar's Oil Minister, Abdullah al-Attiyah, last week said: "There is no supply shortage – on the contrary, the market is saturated with more than enough oil supplies."

Analysts believe Opec will raise output by 950,000 barrels a day, or 4.4 per cent, which would cut $2 off oil prices, according to a Bloomberg survey.

Sir Howard also said fears of corporate fraud were depressing the mood in the City in the wake of the collapses of Enron and WorldCom in the US, even though there had been no similar cases in Britain.

"People are putting a discount in the market for uncertainty, for possible fraud and stated earnings based on American experience when we actually haven't had it," he said.

Sir Howard said investors, who have already shifted into bonds to cushion the blow of falling shares, could absorb further stock market falls – as long as there were no sudden shocks.

Asked what the impact would be if the FTSE 100, which has fallen to about 4,000 from a high of 6,950 two and a half years ago, fell as low as 3,000, he said: "If that happened over six months I would say probably people would be able to position themselves against that and it would happen comfortably. If it fell on Monday to 3,000 I couldn't answer for the consequences."